Standard and Poors made the decision this week to hold off on the decision to downgrade South Africa to ‘non investment grade speculative’ commonly called ‘Junk Status’. A place every country has to avoid as the consequences are devastating.
Getting out of the dreaded ‘Junk Status’ is much harder than preventing it. It’s like falling into an icy pond and trying to get out on the slippery side. It takes years of struggle and hardship to correct and restore the credibility investors look for. Let alone the damage that it does to the image of a country. Who wants to be a citizen of a country which has a high risk of meeting its investment obligations?
What are the ramifications for South Africa?
Foreigner investors will disinvest from SA Projects, Companies, Bonds and Stock Markets leading to a devaluation of assets. In turn the flight of capital out of the country the divestment leads to a weaker currency.
A weaker rand means that out imports will be more expensive (including oil) which translates into a rise in the cost of living.
High inflation and and a weakening currency will lead to higher interest rates which will means that the cost of debt will increase.
Take advantage of the reprieve.
So we have been given a little breathing space by Moody’s last month us and now Standard and Poors . We have been given a reprieve but there is a third rating agency, Fitch, to come. They will be making a decision this month and as they are the smaller of the three will likely follow their counterparts. This brief period of grace creates a chance for us to turn things around. In the meantime South Africans should be saving as much as they can and paying off debt as quickly as possible. If we don’t we will have a much harder landing should a downgrade takes place. A sound financial plan make provisions for the worst scenario so we should not be complacent.
Hopefully, our key decisions makers can pull off a remarkable turnaround in the meantime.